Ten Facts about Adoption-Related Tax Savings

IRS Tax Tip 2013-54, April 12, 2013

Adoption can create new families or expand existing ones. The expenses of adopting a child may also lower your federal tax. If you recently adopted or attempted to adopt a child, you may be eligible for a tax credit. You may also be eligible to exclude some of your income from tax. Here are ten things the IRS wants you to know about adoption tax benefits.

The maximum adoption tax credit and exclusion for 2012 is $12,650 per eligible child.

To be eligible, a child must generally be under 18 years old. There is an exception to this rule for children who are physically or mentally unable to care for themselves.

For 2012, the tax credit is nonrefundable. This means that, while the credit may reduce your tax to zero, you cannot receive any additional amount in the form of a refund.

If your credit exceeds your tax, you may be able to carryforward the unused credit. This means that if you have an unused credit amount in 2012, you can use it to reduce your taxes for 2013. You can carryover an unused credit for up to five years or until you fully use the credit, whichever comes first.

Use Form 8839, Qualified Adoption Expenses, to claim the adoption credit and exclusion. Although you cannot file your tax return with Form 8839 electronically, the IRS encourages you to use e-file software to prepare your return. E-file makes tax preparation easier and accurate. You can then print and mail your paper federal tax return to the IRS.

Adoption expenses must directly relate to the legal adoption of the child and they must be reasonable and necessary. Expenses that qualify include adoption fees, court costs, attorney fees and travel costs.

If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you did not pay any qualified adoption expenses. See the instructions for Form 8839 for more information about this rule.

If your employer has a written qualified adoption assistance program, you may be eligible to exclude some of your income from tax.

Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you cannot claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.

The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount you can claim depending on your income.

For more information, visit the IRS.gov website to see the Adoption Benefits FAQ page. Also, check out Form 8839 and its instructions. Both are available at IRS.gov or you can order the form by calling 800-TAX-FORM (800-829-3676).